Municipal bonds took a bit of a break on Friday as investors prepared for the long weekend and a smaller calendar of events. Yields had risen, causing municipals to underperform U.S. Treasuries and reaching ratios not seen since November 2023.
Kim Olsan, a senior vice president of trading at FHN Financial, noted that the correction in the market had improved relative values, with ratios returning to 70% or higher across various credits. The muni-to-Treasury ratios on Friday were at 67% for the two-year, three-year, and five-year, while the 10-year was at 67% and the 30-year at 84%.
May has historically been a volatile month, and with just a week left, buyers are taking stock of the recent shifts. Intermediate yields are expected to finish at the higher end of a 2.69%-3.01% range.
Despite the recent rise in yields, Olsan pointed out that current levels are within 10% of long-run median values. Municipal issuers have been more active due to uncertainty surrounding the Federal Open Market Committee’s rate cycle.
Muni yields rose this week as primary market issuance took center stage, with the AAA curve showing signs of normalization. The muni curve’s expectations of Fed rate cuts contrast with a weakening Treasury curve, indicating potential economic pressures.
In terms of bond pricing, various municipal issuers are set to enter the market with sizable offerings, including education loan revenue bonds, general receipts bonds, airport revenue bonds, and more.
Overall, the municipal bond market remains active, with investors closely monitoring market developments and adjusting their strategies accordingly.